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Smarter Screening, Richer Revenues: Improving the Bottom Line

Renters are devoting an increasing share of their incomes to monthly rent, and not just in the big cities. Nationwide, more and more people are finding it hard to live by the “30% of income” principle to pay for their housing. This has a direct impact on resident screening, where most rejections are driven by insufficient income to support a given rent price.

Unfortunately, many property managers view screening as a commodity. It’s assumed that the services have access to mostly the same information and use similar methodologies, so low price drives the choice of a screening company. And this can be a big mistake.

“The built-in data and intelligence of the system you’re using has a big effect on leasing decisions,” says Andy Larson, Vice President of LeasingDesk at RealPage, Inc. “A simplistic solution will inevitably have you turning away people you shouldn’t, and that’s a crime considering how much it costs to get a prospect all the way to the application process.”

Turn some “no’s” into “yes’s” – and improve the bottom line

So what are some of the features that distinguish a “smarter” screening system?

One major feature is the quality of data. It’s just not true that everyone has the same information. For example RealPage uses rental payment histories as a predictor for leasing potential residents of a community.

This is a critically important criterion for screening, considering there are millions of renters who might have missed credit card or electricity payments, but have never missed a rent payment. Their credit might not be great, but their history of paying their rent on time is superb.

Some screening companies claim to have payment data, while in reality they have only the limited data from voluntary reporting. This is heavily weighted towards the “negatives” reported by properties, such as evictions and damages, and is not a true reflection of the prospective resident’s likelihood of paying rent on time.

Another differentiator for better screening? The flexibility to offer alternatives, so property managers don’t have to simply say “sorry” and watch applicants walk out the door. With its “potential rent limits” feature, RealPage’s solution spits out a price the applicant can afford based on the company’s criteria after they’re rejected for a certain unit. This allows the agent to offer a less expensive alternative on the spot.

And yet another mark of superior screening: the ability to adjust screening standards in real time to reflect changing market conditions and inventory availability, without relying on human guesswork.

“Empty apartments make no money at all,” says Larson. “It’s better to rent the apartment at some price than to have it sitting empty, but you have to weigh that against the risk, and the possibility that demand will increase and the unit could be rented for more. A good screening solution should help you determine scientifically how much to relax standards instead of leaving your people to use their hunches.”

The challenge of changing laws

Beyond the calculations of risk and its effects on rent pricing, there’s a changing legal landscape to navigate. A screening solution that isn’t backed by a vigilant staff monitoring this landscape leaves property managers vulnerable to mistakes, or even litigation.

A recent example of the court system’s effect on housing decisions is the “disparate impact” law, which bars employers and housing providers from including among their decision-making criteria anything that has a disproportionate impact on people from a protected class. This is usually related to factors such as race, age, disabilities or religious beliefs.

Issues such as these often leave property managers seeking advice – advice they won’t get from a screening company that merely provides software and doesn’t involve itself in regulatory issues.

Another issue is the treatment of criminal data. In California, for example, it is now illegal to use Megan’s Law, which deals with sex offender status, as a screening criterion to deny housing to an applicant. Every state, in fact, is free to regulate how criminal data can be used.

At RealPage, analysts are working on correlating criminal data with FICO scores, addressing the problems of false positives, classifying crimes for more accurate use in screening, and developing other projects designed to fine-tune the screening process for clients. They’re also monitoring “disparate impact” and other legislation on an ongoing basis.

The bottom line is that there’s a lot more to choosing a screening provider than price. Viewing screening as a core value-driver rather than a commoditized step in the leasing process can make a big difference not only in resident quality and financial reliability, but also in areas such as occupancy rate and revenues.

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Based in New Orleans, Guy Lyman is a professional writer with over 25 years’ experience writing about multifamily and commercial real estate. Lyman is a frequent contributor and writer for the Property Management Insider blog.

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